Department of Finance publishes Ireland’s Corporation Tax Roadmap

The Department of Finance have published its Roadmap in respect of Ireland’s Corporation Tax regime. It discusses the journey taken in recent years while laying out the next steps in Ireland’s implementation of various commitments made through EU Directives, the OECD Base Erosion and Profit Shifting (BEPS) reports and the recommendations set out in the Coffey review.

The roadmap is a welcome document and we look forward to further dialogue with the Department of Finance in the future.

You can access the roadmap document on the Department of Finance’s website by clicking here.

The Roadmap details various elements of International tax reform in recent years , the actions Ireland has taken on corporate tax thus far including its work on EU Anti-Tax Avoidance Directives and Seamus Coffey’s recommendations and outlines the commitment to further action.

International tax reform in recent years

The roadmap acknowledges that tax reform was needed on a global level with respect to all forms of tax avoidance and evasion following the onset of the financial crisis. The implementation of the OECD Common Reporting Standard (CRS) and the US FATCA agreements saw the widespread implementation of automatic exchange of information between tax authorities.

The roadmap notes the significant body of work completed by the OECD in addressing BEPS with the publication of 13 reports covering 15 actions to combat BEPS in October 2015. At an EU level, the roadmap specifies the agreed six new Directives primarily related to implementing the BEPS recommendations.

At the OECD, the roadmap notes Ireland’s signature for the implementation of the Multilateral Instrument. The roadmap states that Ireland will complete the process before the end of 2018. The Multilateral Instrument will then generally start to have effect for Ireland from the beginning of 2020.

It notes that Ireland remains committed to international tax reform and believes that any reforms must be built on the arms-length principle and a common understanding of where value is created. Reforms must be globally agreed and implemented in order to prevent the recurrence of mismatches between jurisdictions and to continue to develop new robust global standards that are sustainable in the long term.

EU Anti-Tax Avoidance Directives

The roadmap provides insight into some of the decisions being taken in implementing the ATAD as follows:

ATAD Controlled Foreign Company Rules

The Department of Finance have decided that Ireland will elect for the Option B approach when introducing CFC rules in Finance Bill 2018. Option B attributes undistributed income arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. It requires an analysis as to whether the foreign entity would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income. Member States must introduce CFC rules, or bring existing national CFC rules into alignment with the ATAD where relevant, by 1 January 2019.

The Department of Finance are publishing a feedback statement in respect of the adoption of Option B CFC methodology which will open further dialogue with the Department of Finance on this issue.

General Anti-Abuse Rule (GAAR)

The Department of Finance have noted that Ireland has already a robust GAAR and it is considered that no amendments will be required for compliance with the ATAD provision.

Exit Tax

The exit tax provision under the ATAD does not have to be implemented until 1 January 2020. Ireland currently has a limited exit tax regime, however the ATAD exit tax is significantly broader in scope and will impose a tax charge on all unrealised gains of migrating companies, irrespective of any future intentions as to the disposal of the assets and/or a future return to the State.

The roadmap does not specify a proposed rate for the exit tax. It did acknowledge that most submissions to the public consultation on the Coffey review and ATAD implementation expressed a view that the 12.5% rate of tax should apply in respect of assets in use for the purpose of a trade liable to tax at 12.5%.

The roadmap states that legislation will be introduced to replace the current provisions with an ATAD-compliant exit tax, to take effect no later than 1 January 2020.

Hybrid Mismatch Rules

The Department of Finance will be introducing legislation in Finance Bill 2019 to bring the first tranche of anti-hybrid rules into effect from 1 January 2020. Further legislation relating to anti-reverse hybrid provisions will be introduced in a subsequent Finance Bill, in line with the ATAD schedule.

It is important to note that the roadmap has signalled a public consultation on this matter which will consider both general and detailed technical issues relating to the interlinked issues of hybrid entities/instruments and interest in late Q3 2018. The consultation period intends to run for 12 weeks.

Interest Limitation Rule

Ireland is required to introduce an ATAD-compliant interest limitation rule. The general implementation date for the ATAD interest limitation rule is 1 January 2019, but a derogation is provided such that Member States having national targeted rules which are equally as effective at preventing BEPS risks as the ATAD interest limitation ratio may defer implementation until agreement on a minimum standard for BEPS Action 4 is reached at OECD level, but no later than 1 January 2024.

Currently, Ireland has existing interest limitation rules but they differ in structure to the ATAD rule. It is the Department of Finance’s opinion, supported by case study data, that Ireland’s existing interest limitation rules are at least equally effective to the rules contained in the Directive, and a notification in this regard has been filed with the European Commission. The roadmap acknowledges that initial responses from the Commission was that it has indicated a stringent ratio-based approach is required to have equally effective rules, which Ireland does not have. However, according to the roadmap it is unclear as yet if agreement will be secured in relation to the derogation, given that Ireland’s rules are structurally different.

The roadmap explains that work has also commenced to examine options to bring forward the process of transposition from the original planned deadline of end-2023. It continues that in view of the complexity of our existing interest limitation rules, it is anticipated that transposition could potentially advance, at the earliest, to Finance Bill 2019. The roadmap notes that a public consultation is planned for Q3 2018 to seek views on the inter-linked issues of the ATAD anti-hybrid and interest limitation rules.

Transfer Pricing

Significantly the roadmap notes that legislation will be introduced in Finance Bill 2019 to update Ireland’s transfer pricing rules with effect from 1 January 2020. It recommends that it is important for changes in Irish rules to be made in a careful and considered manner as one coherent package, rather than in a piecemeal approach over a number of years. It is intended to launch a public consultation in early 2019 to allow stakeholder input on whether any additional changes to Ireland’s tax code are needed to ensure TP rules are fully effective in ensuring tax is paid where value is created and do not facilitate the transfer of profits to jurisdictions other than where value-creating activity takes place.

Consideration of a Territorial Regime

The roadmap has stated that it is intended that a public consultation will be launched in early 2019, seeking further input on the alternative options of moving to a territorial regime or conducting a substantial review and simplification of the rules for the computation of double tax relief.

The document notes that responses to the Coffey/ATAD consultation indicated broad support for moving to a territorial based tax system among stakeholders, particularly in view of the forthcoming introduction of CFC rules from 1 January 2019.

Key takeaways

It is clear from the roadmap that Ireland is fully committed to implementing effective tax measures that promotes transparency and combats tax avoidance and evasion. It is also clear that the Department of Finance is committed to taking on the views of all stakeholders given the following forthcoming consultations, while also continuing its commitment to a certain and stable tax regime, in particular maintaining Ireland’s key 12.5% rate.

ATAD CFC Rules

Planned for Q3 2018

ATAD interest limitation rules

Planned for Q3 2018 to seek views on the inter-linked issues of the ATAD anti-hybrid and interest limitation rules

ATAD Hybrid Mismatch Rules

Planned for late Q3 2018.

Updating Ireland’s transfer pricing rules

Planned for early 2019

Consideration of a Territorial Regime

Planned for early 2019

The Roadmap should provide business with more certainty on the changes that will be addressed as part of significant reforms to the Irish corporate tax code, and relevant timelines, over the next few years. The Corporate Tax Roadmap highlights important developments which business are already considering, and which will require continued focus by business in assessing the future impact and identifying any changes, additional compliance obligations, and/or restructuring that may be required as the reforms are adopted. Deloitte are working closely with business to address these impacts, and will be engaging actively with the Department of Finance as part of forthcoming consultations.

If you have any questions on the above or would like to discuss further please do not hesitate to contact us or any member of the tax team.

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